The jeonse problem

Sky-high jeonse prices have become a norm. Jeonse, referring to lump-sum rent deposit in Korea, has been climbing north for 78 months in a row since March 2009. The cumulative rise has amounted to 47.5 percent. Jeonse rates now account for 72.4 percent of the actual value of the property. That figure was under 60 percent before the rise. Tenants dread the passage of two years when they have to renew their contracts. Homeowners in Seoul and around the capital demand more than 100 million won ($84,000) in rent renewals. About 24 percent of jeonse rents cost more than 300 million won in Seoul. Jeonse has become a nightmare for middle-class Koreans.

Jeonse prices have jumped because more homeowners prefer monthly rentals, instead of the usual two-year contract, due to low interest rates on deposits in banks. Monthly rentals accounted for 41.5 percent of the market in July, up five percentage points from the same period a year earlier. Jeonse offers have become scarcer, fanning the price rise.

A transition is inevitable. Jeonse is a uniquely Korean arrangement. It was invented during the fast-growth days, when the population was on the rise and home prices shot up. But the pace of jeonse gains has been too fast and steep, hurting the overall market and the economy.

Burdensome home rent prices have chilled consumption. The central bank’s guideline interest rate now hovers at 1.5 percent. Banks levy about 3 percent in borrowing cost for long-term jeonse deposits but 7.4 percent on average for monthly deposits. The home expense burden was more than 22 percent higher than a year ago in the second quarter. It is no wonder consumers have little left to spend. The Bank of Korea estimated that household consumption would be pared by 0.2 percent if monthly rents go up 10 percent.

The surge in household debt is partly due to the rent crisis. Household debt ballooned by nearly 100 trillion won ($83 billion) over the past year to reach 1,100 trillion won. People buy homes to avoid the agony of moving every two years or taking out loans to pay for jeonse deposits. The rent crisis has become a stumbling block to economic recovery.

Yet the government remains oblivious. According to the Korea Housing Institute, seven of the eight real estate measures the government introduced since last year actually did more harm than good. The government must be more aggressive. It must dramatically increase public rental supplies for the working class and young people. It must lower the monthly rents for public housing to encourage monthly rents overall to go down. The government must keep its eye on the bigger picture.

JoongAng Ilbo, Sept. 5, Page 26